The power industry's increased reliance on natural gas, coupled with the uncertainty on the timing and size of liquefied natural gas (LNG) supply additions, has created an "unprecedented" set of risky alternatives for utilities and regulators, according to a scenario analysis unveiled by Cambridge Energy Research Associates (CERA) Thursday at CERAWeek 2005.
"Future LNG supplies in North America are critical in all scenarios for future electric power generation," said Larry Makovich, senior director of North American Power. "While it has become clear that the gas industry cannot drill its way out of the current supply tightness, the most recent wave of generation investment has cemented-in natural gas demand growth from the North American power sector."
CERA estimates that power sector needs will cause natural gas market demand to expand between 14% and 36% by 2020, depending on how economic, social, political and technological scenarios unfold over the next 15 years. The likely result is an "increased risk of higher costs, on-going uncertainty surrounding natural gas supply, a drive to bring new sources of gas supply to market and an opportunity for other power generation fuels and technologies...to grow," especially coal, renewables and power, Makovich said.
With a permanent shift to higher gas demand levels, utilities' primary avenue for assuring adequate supply and managing price volatility will be to acquire alternative supply of LNG and new natural gas from Alaska, according to the briefing. However, the power industry is likely to see more fuel diversity in the next wave of power plant construction.
"Under all scenarios CERA sees strong growth in renewables, conservation, and efficiency. Nevertheless, more traditional sources of new power supply are needed, including a significant role for new coal-fired generation, which was once considered a non-starter. In some scenarios new nuclear power plants will begin operations after 2014."
CERA also found that "some level of new coal-fired power generation is part of all scenarios because differentials between coal and natural gas prices, and a preference for secure domestic energy sources make new coal plant construction attractive, especially in coal-conducive states and provinces."
Because natural gas supply faces challenges keeping pace with demand in the decade ahead, a significant role may be ahead for new coal-fired generation, "even under a scenario with very stringent environmental rules if technology breakthrough -- such as carbon sequestration -- help resolve concerns over emissions from power plants."
The CERA analysis found that it is possible that, between 2010-2015, newly added coal-fired generation could offset the need for as much as 5 Bcf/d of gas used for power generation, or up to one-tenth of all the gas produced in the Lower 48 states and the equivalent of the output of five large LNG regasification plants.
However, new coal generation may only be centered in certain regions, CERA found. More than half of the up to 70 GW of coal-fired generation capacity that could be added by 2020 is expected to be located in the central United States -- particularly in areas with existing coal industries and large coal fleets, and almost none in coastal regions.
The realities of the North American natural gas supply and cost environment that seem not to be fully recognized and provided for by utilities include an increased demand on natural gas and gas production declines. CERA also noted that "although all scenarios envision large increases in LNG imports into the U.S., constraints at the production/liquefaction stage of the LNG chain -- caused by apparent reluctance to make costly long-term infrastructure commitments and slippage in schedules and contracts -- would mean that LNG supplies alone will likely not be available to meet the emerging natural gas supply shortfall."
For more information on the report, visit www.cera.com.
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